LONDON: Oil rose above $125 a barrel on Thursday, on expectation that Greece would win enough creditor support to avoid a messy default on its debt, and after Iran's Supreme Leader Ayatollah Khamenei said talks of sanctions agains Iran were 'delusional'.
Crude recovered from losses earlier in the week after a Greek government official said its bond swap offer was going well as banks and funds showed support, spurring optimism that the deal will pass and clear the way for a bailout package to avert an immediate default.
Front-month Brent added $1.21 to $125.33 a barrel by 1227 GMT, having touched earlier intra-day highs of $125.58. US crude was up 78 cents at $106.94 a barrel, off slightly from earlier highs of $107.16.
Analysts said Greece would likely remain a source of uncertainty for markets ahead of a 2000 GMT deadline for investors to sign up to the restructuring designed to trim 100 billion euros off the country's public debt.
"An agreement over the Greek bond swap will be a key driver, indirectly impacting oil price through the foreign exchange markets and how the dollar will move against the euro," BNP Paribas' head commodities strategist Harry Tchilinguirian said. "For now, sentiment is positive and the dollar is pulling back a little, supporting higher oil prices this morning."
The dollar index was down 0.55 percent by 1227 GMT. A weaker dollar helps make greenback-denominated commodities such as oil and gold more accessible to buyers in other currencies.
Investors were still focused on the tensions over Iran's nuclear programme, which have driven recent oil gains. Iran's supreme leader Ayatollah Ali Khamenei told news agency IRNA he welcomed Obama's words on a diplomatic "window of opportunity", but said that continued talk of sanctions against Iranian people is "delusional".
"Now that Khamenei took power, it will be easier to conduct negotiations as now world powers face one voice," Olivier Jakob from Petromatrix said. "But the market in general is not confident it's able to read whats going on in Iran, so it will wait for other signals".
France on Wednesday voiced scepticism that a revival of talks between six world powers and Iran would succeed, saying Tehran did not seem sincerely willing to negotiate about the future of its nuclear programme.
Supply tightness could become more apparent as Royal Dutch Shell starts looking for alternative crude when its deliveries of Iranian oil under outstanding contracts come to an end to comply with sanctions within weeks.
The European Central Bank kept interest rates unchanged at 1 percent, with eyes on its news conference later today for any signals about future policy, although many analysts believe it has played its part in fighting the euro zone debt crisis after a series of dramatic and controversial measures.
Economic data also helped, with news that Japan's economy shrank less than initially estimated in the fourth quarter, as companies ramped up spending, supporting oil prices. The revision to GDP showed a 0.2 percent contraction as companies look to an increase in demand due to reconstruction of the country's tsunami-battered northeast coast.
On Friday, the world's top oil consumer the United States will issue more comprehensive private and public sector employment data for February. A Reuters poll forecasts a gain of 210,000 in nonfarm payrolls, with a rise in the private sector of 225,000 jobs offsetting a modest dip in government jobs.
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